Free Trade Policy in the economy is a boon or bane to the society

Free trade, a set of policies that allow goods (and possibly capital) to flow between countries relatively unencumbered by tariffs or onerous regulations, is one of the areas with the strongest consensus among economists. And yet it's a very frequent punching bag, with politicians on both sides of the aisle blaming free trade, disadvantageous trade deals, and competition from developing nations for American uncompetitiveness, a decline in jobs, and a general immiseration of the middle class. The idea underlying the economic consensus on free trade is that of comparative advantage. This is a point that rarely makes its way into the popular discourse, so it warrants some explanation.

What is the comparative advantage?
In short, each country will have certain things that it's relatively good at and others that it's relatively bad at; by making things it's good at (i.e. the products in which it has a comparative advantage) and selling those to buy things it's bad at, the country can become far richer than if it tried to produce everything domestically. Very often in the press, this concept is confused with absolute advantage, namely which countries are straight-up better at things. And sometimes, the two match up. 
No matter how much money or manpower you throw at the problem, you will never be able to grow coffee in Ireland; in this case, Ireland has both an absolute disadvantage at coffee growing (countries with the ability to grow coffee are better at growing coffee than Ireland is) and a comparative disadvantage at it (Ireland is better at nearly everything else than it is at coffee growing). But that needn't be the case - indeed, a country can be strictly worse at producing literally anything than another country is and still have relevant comparative advantages that allow both countries to gain from trade.
To illustrate this, let's build a simple little toy model. Let's take two people, LeBron James and you. Unless you're Steph or Westbrook, LeBron is better at playing basketball than you are. And for the sake of argument, let's assume that he's better at mowing his lawn than you are (maybe he's physically able to get around the lawn quicker?). In particular, let's suppose that LeBron can create $475,000 of value per hour (his current salary per 60 minutes of game time, the regular season only) while he's playing basketball and $2,000 of value per hour while he's mowing the lawn (he's REALLY fast). 
Meanwhile, you can produce a whopping $1 of value per hour while playing basketball, but you can produce a respectable $20 of value per hour mowing the lawn. LeBron is 475,000 times better than you at playing basketball, and he's even 100 times better than you at lawn mowing. He has an absolute advantage in everything; you have it in nothing. So should LeBron, the better lawnmower, also be mowing everyone's lawns? Nope. If he were to split his time 50-50 between playing basketball and mowing lawns, he'd wind up creating 475,000 * 12 + 2,000 * 12 = $5,724,000 of value per 24 hours. Quite a lot.
 But what if he spends all his time playing basketball and instead relies on you to mow everyone's lawn? Now he's creating 475,000 * 24 = $11,400,000 of value per 24 hours. You spend all your time mowing lawns, so you produce 20 * 24 = $480 of value per 24 hours; its' a pittance compared to what LeBron produces, but nonetheless trading basketball for lawn moving with you and focusing only on what he has a comparative advantage in rather than everything that he had an absolute advantage in has allowed you two to create more value than you could have otherwise and made you both better off.

Real-world examples
Of course, that LeBron lawn mowing example is awfully silly and contrived. Don't we have any real-world examples of this phenomenon to go off? As a matter of fact, yes we do. We can broadly think of the economy as relying on four major factors of production: land, capital, mental labor, and physical labor.1 The US has the first three in abundance, but we have less (and more expensive) physical labor. Thus, our comparative advantage will lie in things that mostly require capital, land, or mental labor to produce since we have those in relative abundance, and we'll have a comparative disadvantage in things that require lots of physical labor.
As a result, we export things like food (which takes lots of land and capital), highly automated high end manufacturing like airplanes or computer chips (which require lots of capital, and some mental labor to design the components and engineer the robots), and white-collar services and intellectual property (which require mental labor uber alles), but we import consumer goods since those mostly require lots of physical labor. Instead, we import those from developing nations, which have relatively small amounts of educated mental labor and capital but lots of physical labor.
Economists have extensively researched the impact of trade on growth and real incomes worldwide. The data shows that increased trade has a large, robust impact on real income growth, and this result has been verified many times

What about trade deficits? Aren't those unsustainable and hurt the economy?

One frequent attack on free trade is that it enables large trade deficits and the deleterious effects they bring. National Trade Council head Peter Navarro, for instance, has asserted that "when net exports are negative, that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth." This statement comes from a fundamental misunderstanding of how GDP is calculated. GDP can be represented by a simple equation of GDP = Consumption + Investment + Government spending + Exports - Imports (sometimes exports - imports is written as Net Exports). GDP = C + I + G +NX.
 From a naive mathematical perspective, imports must harm GDP since they are subtracted. But the only reason we subtract imports is that all imports are consumed (C), invested (I), was purchased by the government (G) or exported back out (E). Imports have no net effect on GDP - they increase C, I, G or E and then are subtracted back out. Fewer imports would mean that the 'minus imports' portion of the equation gets smaller, but also that the associated consumption/investment/etc gets smaller.
Imports are perfectly fine in their own right. They provide goods that people demand. And they can even serve as key complements of production, allowing domestic firms and manufacturers to be more efficient. For example, the iPhone is a product that is designed in America, sources its components from around the world (including America, South Korea, and China), and is then assembled in China before being sold worldwide. Although the finished iPhone is technically an import from China, housing that step of the supply chain in China serves mostly to allow the domestic company behind the iPhone, Apple, to be more efficient and have greater latitude to do in-house and in the US the tasks most efficiently done here.
More generally, the flip side of net imports is capital inflow. By sheer accounting identity, any country running a trade deficit is also attracting savings and capital from abroad, and any country that is running a trade surplus must be investing in the rest of the world (a more complete explanation can be found. That influx of savings reduces interest rates, which makes it easier for people to borrow money to buy houses, invest in capital to start or grow their business, etc. and gives the economy a short term boost2. And the capital formation allowed by this investment, in turn, raises the productive capacity of the economy in the long run, making the country even richer.

Okay, but there are some people who lose from free trade, right?

Think back to the way we thought of the US economy in the Real-world examples section, with production relying on four major factors of land, capital, mental labor, and physical labor. As the US opened up to trade, it began exporting things in which it had a comparative advantage, namely things requiring lots of land, capital, or mental labor. This benefited the people owning those factors, like farmers, investors, and white-collar workers, by giving them a global market for what they had to offer.
And the US also began importing things in which it had a comparative disadvantage, i.e. things requiring lots of physical labor. This benefited consumers and the country as a whole by allowing the US to focus on things it could produce efficiently and import other things very cheaply. But it also hurt those people whose primary means of contributing to the economy was by offering their manual labor - they now had to compete with imports from developing countries that could offer manual labor much more cheaply. And so free trade, despite making the country as a whole better off, wound up lowering the incomes of people who mostly provided manual labor, blue-collar workers.
In principle, it should be possible to avoid any negative effects whatsoever. After all, the cumulative benefits to the country outweigh the costs. The government could tax the capital owners and white-collar workers who reaped the bulk of free trade's benefits, use the revenue to restore the incomes of blue-collar workers and provide them with the training and opportunities required to get jobs in the sorts of fields America has a comparative advantage in, and wind up having left nobody worse off than before. 

And there have been some attempts to do so; in addition to the standard channels of redistribution like welfare, unemployment insurance, or the Earned Income Tax Credit, there is also Trade Adjustment Assistance, which is targeted specifically at helping those negatively affected by trade and globalization retrain and find new jobs. However, the usual channels of redistribution typically only kick in under dire circumstances of unemployment or near-poverty and Trade Adjustment Assistance has, in practice, been rather ineffectual. So those who lost out from free trade have largely been left on their own to deal with any losses themselves.
And unfortunately, they have suffered losses. A recent paper examined the effects of China joining the World Trade Organization on the American economy. As per the general consensus, it found that this "China Shock" had no net negative effects; unemployment and real incomes nationwide were not harmed. However, there were much larger losses concentrated in counties heavily dependent on manufacturing. 

In those places, unemployment did rise, incomes did fall, and even after 20 years, the process of adjustment remained slow and painful. None of this detracts from the overall theme that trade is a net good and helps the country overall. Indeed, the paper's authors were rather vociferous proponents of the failed TPP deal. However, it does illustrate the fact that free trade does have costs as well as benefits, and that policy has to be well designed to manage those costs and provide new opportunities for those left behind.


Extra reading

In addition to the various posts referenced in the text of curious readers who want to understand more about trade might want to read the following:
  • NAFTA and other trade deals have not gutted American manufacturing — period. A defense of the general principle of free trade, a look at how small the impacts of NAFTA and the WTO really were on American manufacturing as a whole, and some critique of the redistributive failings of US trade policy.
  • Ricardo's Difficult Idea. Goes over the basic idea behind comparative advantage, why it can be hard to understand from an outsider's perspective, and why a fair number of people instinctively push back against it.
  • What Do Undergrads Need to Know About Trade? A high-level summary of the basic points of the trade.
  • In Praise of Cheap Labor. Examines free trade and sweatshops not from the perspective of what's good for Americans but what's good for those in developing countries, and argues that much of the moral outrage over "exploitative" sweatshops fails to consider the actual alternatives available and substitutes a visible bad situation from an invisible worse one.
  • The Heckscher-Ohlin model. A workhorse model of international trade that examines how comparative advantage can arise by different countries having different ratios of key factors of production, like capital or labor. The first paragraph of the section on Real-world examples relied heavily on this model and one of its key implications, the Heckscher-Ohlin theorem, and the section on the people who do lose out from free trade relied heavily on the model and another of its key implications, the Stolper-Samuelson theorem
  ~ Full credits goes to

Deposit and Invest your money for short and long term : For Indians

Everyone is seriously aiming to become successful in their day to day life to achieve certain goals. Is everyone becoming so successful in their life?. No, is the general answer but can we make it successful?. Yes, that is possible but what are the ways to make it possible and in life, we live today. Every good we purchase, the services we offer and for the necessities, Money is important to everyone.

Money is a basic exchanging commodity that is been served as I.O.U for all these days since gold exchanges been updated by British traders all over. But to earn money, everyone has to work a lot or to make a lot to save, to buy and to even invest. Actually, the printed paper is useless when it has no value. It is the treasury department of every govt ( mostly ) deals with the direct economy in the form of taxes, subsidies, loans, the return of interests.


The accumulation of great fortunes calls for Wealth and Power, which is acquired highly through the organized and intelligent means of special knowledge. Coming to the point straight, what actually is wealth ?. How we can be wealthy?. Even with the hard-earned money, it is not an easy job for everyone to become rich .. And rich fortunate doesn't cast in spills as we have seen in fantasy movies like Hakuna Matata. If we have wizard-like them, life would be so easier to move on.

Generally, Life doesn't take you so easily in every stand. We need discipline and self-control a lot to maintain our financial standard of living. Whenever, we watch successful entrepreneurs like Warren Buffet, Bill Gates, Mukesh Ambani won't we think ourselves that why don't we be on the list. It is very quite common for the nature of any human being to become successful and traditionally will to do a do-attitude that drives the passion away.

I am not going to talk about some follow your passion lectures here. I just want to share up my own experiences and also the expert advice to every common to erudite their knowledge and share how to become rich and wealthy. Keep in mind that you have engaged in an undertaking some major importance to everyone.. You must have serious plans to follow up, which are faultless. Okay, Let me tell you what are the ways you can save and invest the earned money to become really wealthy in the future.


If you are in India, it will be more helpful for every Indian citizen to earn their pennies to lump sums to put into any of these if possible.

Depositing in Bank as Fixed Deposit or Recurring Deposit

Put some hard-earned money in Fixed Deposit Scheme. Your money is important to you and you cannot waste your hard-earned money into some Ponzi schemes which make you poor. Always, invest some portion of your amount in Fixed Deposit which comes with the annual interest to 7.95 %. Check with the banks of higher interests before depositing. If you cannot able to put a portion of the full amount in FDS, you can try out Recurring Deposit Scheme. In RDS, You can put portion of your monthly savings to RDS to have a Monthly deposit scheme for up to 2 years is advisable.


Investing in Mutual Funds 

But if you are willing to take money after 2 years period, then you might consider putting into Mutual Funds. I've already talked a lot about investment schemes in Mutual Funds. Investing in MF's is an easiest way to build your wealth and all the Mutual Funds are registered under the Securities and Exchanges Board of India. 

It has kinds and varieties of funds that you can access through distributors or going to the fund management company team directly. For many people, who don't know what Mutual Fund is ?. Let me give you a short brief of that. Mutual Fund is a scheme for the pool of investors that is professionally managed by a fund manager in securities of these institutions to purchase securities as units.

You can invest in Mutual Funds through AMC and it has many types of funds like index funds, bond funds, equity funds, Balanced funds, Money Market funds. Do these funds really work?. Yes ! they do. How I am so sure about these Funds and as being a normal person, everyone has questions about the interest rates of these funds. Yeah! these funds carry a risk that is low and also returns are better than bank FDs. If you are likely to take your investment more than two-three years, then you should definitely consider investing in Mutual funds in any of the schemes which are comfortable and convenient for you. 

Some funds have exit loads upto 1-2% and also lock-in period min tenure up to 3 years. So, it's surely a midterm and long term beneficial investment. It not only grows with the risk of the capital you invested but also it helps you to maintain discipline. You can either go for a monthly payment option called Systematic Investment Planning or you can go for the full purchase of MF bonds as units. Just a Demat account is additionally necessary to monitor these 

Okay! If you watch Nifty or BSE, you must wonder how these indexes soar like anything from previous years. It reflects the current economy of the country indirectly or advances but still, its a worthy investing indexing option in MF called Index funds which are solely relying on index volatility. So, these index funds are really helpful for investors than hedge funds. Anyhow, hedge funds are seriously good for any investors 

Let me illustrate you with a few examples which make you understand easier. Consider taking these cases

Case 1

You have got 1 crore and your investment horizon is more than 10 years. So should you put your money in

  1. 1 Crore in an equity fund (or equity-oriented hybrid fund) on day 0. OR
  2. Put your money in a short-term debt / liquid fund and start an STP into the equity fund at monthly (120 installments) / yearly (10 installments) intervals.
  3. Keep your money in your bank account and start SIP into the equity fund at 120 monthly / 10 yearly intervals.
Since the investment horizon is quite long, it is much better if one chooses option 1 (whatever be the Sensex levels or Nifty levels). Option 3 will give you a lesser overall return because the long term return from the cash component will be quite less than of the diversified equity asset class.
Case 2
You do not have 1 Crore but can invest at a rate of  10,000 INR per month (Total principal amount 1 Crore, over 10 years). So should you, since lumpsum is better than SIP,
  1. Start putting your money into your account/liquid fund over all those 10 years, and then invest a lump sum at the end of 10 years, OR
  2. You should start putting the money directly into Equity as a regular SIP.
The answer is obviously 2 since you will not be missing out on all those 10 years of equity returns. If you have money to invest for the long term, put that money into a diversified equity asset ASAP. If you have got lumpsum (eg, bonus money or tax refund), then invest lumpsum. If you have a regular stream, then invest at a regular interval.
There are some investment checklists which needs to be considered before investing and get to know things of mutual funds 

Asset allocation

  • What assets currently make up your portfolio, and why?
  • Has one asset class recently outperformed others, and is that why you own it?
  • Do you own a certain percentage of stocks or bonds because it’s comfortable? Or have you critically assessed your portfolio’s risk/return tradeoffs and how those square with your goals, needs, and time horizon?
Stock picking
  • You’re eyeing a stock to buy. Do you like it because it’s on a tear? Or is it on a downswing and you think it has to go back up? If either answer is yes, you could be trading on price movement—a classic mistake for an investor (not for a trader).
  • How familiar are you with the company’s fundamentals? What are its valuations? Recent and expected earnings?
  • How clean is its balance sheet? Does the business have strong cash flow, revenues, and manageable costs?
  • What do you know about the firm’s officers, board or other major shareholders (how is the management)? What about its business model? Is it equipped to fare well in the coming business environment?
  • If you want to sell a stock that’s recently stunk, are you trading because it’s down? Have you checked whether something fundamentally changed in the business or its future earnings potential?
  • If you want to sell a stock that’s flying, is it because you assume it’ll top out soon? Momentum will fade? Have you investigated whether its fundamentals support future earnings growth?
  • How does the stock fit into your overall portfolio? What sector or country is it in and how much of that do you own?
Market Timing
  • Are you buying or selling according to a seasonal adage about market performance: Like Selling in May, the January Effect, or some other?
  • If you want to liquidate after stocks have taken a quick, steep drop—in hopes of avoiding further losses—how will you know when to buy back in? What if stocks unexpectedly rose in the meantime? Would you run the risk of selling low and buying high?
  • Do you expect a brief drop in the market soon? Are you selling to avoid it? How do you know for sure exactly when it will start or end? Riding out short-term corrections usually hurts less in the long run.
  • What is the media saying about the economy? Does the data support it—or is there a divergence? What have markets been broadly doing as a result?
  • Are you making portfolio decisions based on widely known information—widely discussed fears or events that already happened? All big known information is already reflected in the market data.
  • Have your goals and objectives changed?
  • Are you considering portfolio shifts because your weightings need rebalancing or because your long-term forecast has changed? Or are your nerves getting the best of you?
  • What determines your long-term forecast—how much do you let short-term jitters influence that?
  • There is no such thing as a risk-free investment decision. So what risks—volatility, inflation, longevity, interest rate, reinvestment, credit—are you taking by making your choice? What risks are you trying to mitigate?

So,  you see you can get good returns in the long term and mid-term if you invest in any of these Mutual Funds either index funds or hedge funds will yield you good returns.


Putting an Interest in Bonds 

A bond is a measurement of indebtedness of the bond issue to the holders. The most important is these are the bonds issued by the government to the shareholders or corporates or banks that need debts or securities from investors when they don't like to distribute to the shareholder stocks.  Are bonds really worth to invest for the future ?. Yes! it is. The investor earns interest in each year and is repaid in the original investment on the particular maturity date.

You can buy bonds individually or via. Mutual Fund debt or ETF.  When you purchase the bond, authorized issuer borrows the money from retail investors for a fixed period of time as stated above and the money we earn has a predetermined interest rate at regular intervals. It works similarly like a stock market but how does it different from stock equities or commodity market is actually the circulation of the economy is the difference.

The most important advantage in investing in bonds is that helps you to diversify and grow your money and in India, only two types of bonds are available.

Corporate Bonds:

These bonds are issued by corporations to raise capital. They are quite safer than equities and the bondholders get a specified return every period. These could be further classified into two types

Convertible bonds -  are in fact it is composite security which carries both debt and equity. Till the investor holds the bond, he/ she will receive the interest periodically. However, once it been converted to equity shares, the investor will hold the rights of the stockholder.

Non-Convertible bonds- These bonds are just the plain bonds and don't have an option to convert into any equity or shares and during maturity tenure, the amount along with the principal is being paid to the investor

Government and Bank Bonds:

 These bonds are issued by the government or bank to finance their activities. In India, the Government bond market is larger than the Corporate Bond market and they are popularly known as G-Secs. Normally,. these have return interest of between 7%-10% and the maturity tenure is between 3 years to 30 years period.

In the stock market, holding stocks are the owners of the firm/company /organization whereas in the bond market, bondholders are the lenders and the companies use our money from that. Bonds have defined the time of maturity but whereas in stocks it doesn't have any fixed time of maturity not unless you do future or options trading. There are various schemes in bonds and as being a lender you can hold the bold for either a year, two years, 10 years and 30 years. RBI has also taxable bonds which are having a tenure up to 7 years.


Bonds, in general, carry some risks but not that much when it is been compared to the stock equity investments. Bonds carry the promise of the issuer to return the face value of the security holder at the maturity: whereas, stocks have no such promises to the issuer. It will give you stable returns to the investor and its a very liquid market.

Investing  in Stock market equities  

 Stock Market is an equity market or share market that is actually the aggregation of buyers and sellers of stocks, which represents the ownership claims on the business. The primary purpose of the stock market is to regulate the exchange of stocks, as well as other financial assets. There can be multiple stock trading venues in the country which allow the transactions.

When I mention Invest in Stock Market, You are investing in business not trading it. Many people feel that earning money in stock market is easier but when they initiate it, they fail a lot. Whey they fail because of aggressiveness or greediness. They don't invest in market, mostly trade and they lost in the market and end up in heavy loss.

But what I strongly recommend you to do is to growth investing or value investing rather than going for intraday trading or future or options trading. Usually, stocks are the partial portions of your investment of the company and you should study thoroughly about the company before you invest. Not all companies you invest gonna yield good returns. If you are expecting good returns for long term say more than 5-7 years then consider investing in stock equities.

You should consider these things before you put your money into stock market and those are

  • Don't jump blindly into stock market without even knowing the cons and pros
  • Always understand that the Stock market is a money-making machine. It is just the shares of the company that you gonna invest
  • Try to understand the basics first and get to know what you are investing in
  • Always invest your surplus funds and don't invest everything into stock market
  • Even if you invest in the capital market make sure you don't invest everything under one basket
  • Avoid Leveraging and herd mentality 
  • Don't think like a trader just by thinking that time will fall into the market. 
  • Educate, Be curious and also follow a disciplined market approach
  • Most importantly, don't fall into self emotions or aggressiveness

If you seriously want to become successful in the stock market then you should consider the following above facts and always have realistic expectations


Investing in ETF's 

You might wonder what is an ETF. ETF's are nothing but those are investment-based fund traded on stock exchanges. ETF's work similar to Mutual Funds but here it is not adjustable to equities but also commodities or bonds and generally operates with an arbitrage mechanism designed to keep its trading close to the net asset value.

If it works like Mutual funds then what difference does it make?. Everyone has this question in mind and in fact, many people don't know there is an ETF. Mutual funds and ETF's works almost similar but the main difference is Mutual funds trade at the end of the day but whereas in ETF's trade at the intraday. Stock orders can be made with ETF's but not with the MF's. Interesting that we have this much facility and ETF's have lower expense ratios than MF's.The biggest risk with ETF's is liquidity, because it can be sold short and there are six types of ETF's which are listed below

  • Equity ETF
  • Fixed Income ETF
  • Commodity ETF
  • Currency ETF
  • Real estate ETF
  • Specialty ETF
Every ETF and Mutual Fund has tracking errors. The returns of these products are having only few basis points. These are traded through online brokers and real-time brokers. Port Managers involve actively in buying and selling the shares


If you are looking for very longer investments say more than 10-15 years, you might consider investing in  Other schemes like PPF's , NPS, SCSS.

Investing in PPF 

PPF is a Public Provident Fund scheme which is a savings cum tax savings instrument introduced by National Savings in India introduced by Indian Govt to improve savings scheme. As the tenure for PPF is for 15 years or more, the impact of compounding interest is more and also another benefit in investing is tax-free. It is actually a safe investment and also good capital returns one.

Investing in NPS

National Pension Scheme ( NPS ) is a long term retirement and also focused investment scheme managed by the Pension Fund Regulatory and Development Authority ( PFRDA ). It is a mix of all the above schemes but it is based on your risk appetite and returns are based on the long term and also for short term.

Investing in SCSS

Senior Citizen Savings Scheme is another scheme which is a must-have investment for senior citizens and retired persons. These schemes are available in banks and in post offices for aged persons above 60. Upper investment limit is 15 Lakhs and it has 8.3% ROI and taxable too.

Related Posts :  Risks in stock market , Mutual funds and other schemes ,Invest in india, How to become successful in stock market